International lenders asked Greece on Friday to prepare a package of additional savings measures which would be passed into law now, but implemented only if needed, to make sure the country reaches agreed fiscal targets.
Once agreed, the set of contingent reforms, together with the measures already under negotiation, would enable the disbursement of new loans to Athens and pave the way for the debt relief.
The idea of a contingency package appears to end a long dispute between the euro zone and the International Monetary Fund over whether Greece’s current reforms are enough.
“We came to the conclusion that the policy package should include a contingent package of additional measures that would be implemented only if necessary to reach the primary surplus target for 2018,” the chairman of eurozone finance ministers Jeroen Dijsselbloem told a news conference in Amsterdam after the ministers met.
The contingency measures need “to be credible, legislated up-front, automatic and based on objective factors,” he said.
The contingency package is to produce savings of 2 per cent of GDP, on top of the 3 per cent of GDP savings that are to come from reforms under negotiation now, Dijsselbloem said.
The amount is the difference between eurozone and IMF forecasts of what primary surplus Greece is likely to achieve in 2018 — the eurozone believes Athens can reach 3.5 per cent while the IMF says 1.5 per cent is more realistic.
The current set of reforms includes a pension and income tax reform, the setting up of a privatisation fund and a scheme to deal with bad loans. The content of the contingency set is not decided yet.
Agreement on both reform packages — the regular and the contingent one — would mean euro zone ministers would meet again on Thursday to approve the deal and have a “serious discussion” on debt relief for Greece.
But Athens’ backing for the new package remains unclear. “There are political constraints,” a negotiator said.
The prospect of debt talks may facilitate Greece’s backing, but lenders did not refrain from reminding their Greek counterparts that there are time constraints.
“The liquidity situation is becoming tight, there are debt service payments … more are coming in the next few months, there is a risk that the government may have to accumulate domestic arrears again,” the head of the euro zone bailout fund Klaus Regling said.
TALKS ON DEBT RELIEF STARTING NOW
Talks and analysis on how to design debt relief will now start in parallel with the discussions on the reforms, Dijsselbloem said.
The IMF is insisting on debt relief from eurozone governments because it does not believe Greece can maintain a surplus of 3.5 per cent for decades and debt re-profiling is the only way to make it sustainable in the long run. Greek debt stood at 177 per cent of GDP last year.
Germany and several other countries believe that with proper reforms Greece can keep such a surplus for decades and point to the fact that the country does not need to service its debt for the next seven years.
The Fund says this is unrealistic, and therefore the eurozone must grant the country debt relief through extending maturities and grace periods.
The range of views stem from different macroeconomic assumptions among the lenders on Greek growth and fiscal performance over the next 30 years, officials said.
Wary of German sensibility on the debt relief issue, Lagarde appeared to offer a compromise on Friday.
“The debt sustainability analysis (DSA) …will guide us towards a mechanism that will not require any haircut, but will probably require a reprofiling of the debt using multiple mechanisms,” Lagarde said.
“But this would be triggered when needed, that is upon the completion of all measures that are being discussed at the moment and based on realistic forecasts,” she said.
German Finance Minister Wolfgang Schaeuble said debt relief talks were not a priority.
“That is not in the foreground. What is in the foreground is what has been agreed last year must be implemented,” he said, referring to fiscal targets set last August.
Dijsselbloem outlined how he looked at the issue of debt relief for Greece.
“First of all it might be necessary because we want the involvement of the IMF. Another way is to say it is necessary but not up front, it is necessary maybe in 8 years or in 15 years. We will see that on the basis of the DSA,” he said.
“And then you can discuss if you need to solve these problems now, even if they are in the future… or do we promise a mechanism that we will deal with it in such and such way later on. All of this is yet to be discussed,” Dijsselbloem said.